WASHINGTON — Just a few weeks ago, the path ahead for the Federal Reserve looked straightforward: With inflation cooling and the job market slowing, the Fed appeared on track to steadily cut interest rates.
In September, its officials predicted that they would reduce their benchmark rate four times next year, on top of three rate cuts this year.
Yet that outlook has swiftly changed. Several surprisingly strong economic reports have led to a decidedly more cautious tone from the Fed that could mean fewer cuts and higher interest rates than had been expected.
Fewer rate cuts would likely mean continued high mortgage rates and other borrowing costs for consumers and businesses. Auto loans would remain expensive. Small businesses would still face high loan rates.
In a speech last week in Dallas, Chair Jerome Powell made clear that the Fed isn’t necessarily inclined to cut rates each time it meets every six weeks.
“The economy is not sending any signals that we need to be in a hurry to lower rates,” Powell said. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.”
His comments were widely seen as signaling potentially fewer rate cuts in 2025. And recent economic data suggests that inflation pressures could prove more persistent and economic growth more resilient than was thought just a few months ago. At his most recent news conference, Powell suggested that the economy could even accelerate in 2025.
Wall Street traders and some economists now envision just two, rather than four, rate cuts next year. And while the Fed will likely cut its key rate when it meets in mid-December, traders foresee a nearly even likelihood that the central bank could leave the rate unchanged.
“I absolutely would anticipate that they’ll ease up on the pace of cuts,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “The potential for growth to remain strong — that has to call into question whether they will feel either the need or ability to cut rates at the pace they had previously forecast.”
Economists at Bank of America expect annual inflation to remain “stuck” above 2.5%, higher than the Fed’s 2% target level. The economists now foresee just three rate reductions in the coming months, in December, March and June. And they expect the Fed to stop easing credit once its benchmark rate, now at 4.6%, reaches 3.9%.
In trying to gauge the right level for interest rates, the Fed’s policymakers face a significant obstacle: They don’t know how much further they can reduce rates before reaching a level that neither stimulates nor restrains the economy — what’s called the “neutral rate.” The officials don’t want to cut rates so low as overheat the economy and reignite inflation. Nor do they want to keep rates so high as to damage the job market and the economy and risk a recession.
An unusually wide divergence has developed among the 19 officials on the Fed’s rate-setting committee as to where the neutral rate is. In September, the officials collectively projected that the neutral rate lies between 2.4% and 3.8%. Lorie Logan, president of the Federal Reserve Bank of Dallas, has noted that that range is twice as large as it was two years ago.
In a recent speech, Logan suggested that the Fed’s benchmark rate might be only slightly above the neutral level now. If so, that would mean few additional rate cuts are needed.
Other officials disagree. In a recent interview with The Associated Press, Austan Goolsbee, president of the Fed’s Chicago branch, said he thought the neutral rate is much lower than the Fed’s current rate. If so, many more rate cuts would likely be appropriate.
“I still think we’re far from what anybody thinks is neutral,” Goolsbee said. “We still got a ways to come down.”
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